Need To Know News

China Fine-tuning Policy Amid Uncertainties: The PBoC quarterly monetary policy report maintained the balanced tone of recent Chinese government statements, affirming its commitment to fight inflation while ensuring stable growth in the face of a tougher international environment.

It appears to point to no change in the steady policy in the sideways trajectory for interest rates since last December, with a continued appreciation of CNY relative to a basket of currencies

EUR/USD fell below 1.48 after the ECB’s Axel Weber expressed uncertainty that slower growth conditions will cool elevated inflation in the Eurozone.

Weber also provided the usual ho-hum ECB cadence, promising inflationary vigilance to ensure properly entrenched inflation expectations.

FX markets have become increasingly touchy to growth warnings from ECB officials, which may have been the case today as EUR extended declines after Weber said higher energy prices will reduce growth potential in the Eurozone.

On rates, Weber said current ECB rates are congruent with price stability — a counterintuitive assertion given recent Eurozone inflation data.

Norges Bank held the policy rate steady at 5.75% as we widely expected.

In the statement accompanying the rate announcement, Governor Gjedrem said that “the key policy rate will remain at the current level, or perhaps somewhat higher, in the coming year. New information does not provide a basis for departing from the strategy set out in June”.

This strategy indicated the possibility of another 25 bp rate hike in late 2008/early 2009.

Meanwhile, the Norges Bank says it is likely that Sweden’s Riksbank will hike its repo rate next month.

The ECB’s Klaus Liebscher attempted to remove some EUR/USD negativity, which has increased since the ECB’s rate decision last week. The ECB council member said he expects a protracted period of inflation above 2%, and that the ECB had cause to increase hike rates in July.

Liebsher promised the ECB would continue to warn on the “worrying” level of EU inflation, though the ECB claims to have no forward rate bias.

Liebsher’s attempt at jawboning EUR/USD higher comes after EUR/USD’s near-4% decline last week. Interest rate futures in the EU imply a 4.95% rate by year’s end.

Liebsher’s comments have had a limited impact on EUR/USD, which continues to dance around the 1.50 handle, but his hawkish comments may have prevented a more extended sell-off after EUR/USD tested 1.49 overnight.

The bank said growth was not significantly weaker in Q1, and the Q2 performance will be similar. There are still risks to slower economic growth.

Although inflation expectations in the medium term are well-anchored, the balance of risks on inflation is getting worse, and inflation could be higher than the existing forecast in 2008 and 2009.

ECB Governing Council Member Christian Noyer said difficulties are still affecting financial markets and central banks have the duty of preventing said markets from “seizing up.”

The Banque de France Governor reiterated the ECB’s party line of focusing on price stability, and his comments underline the recent increase of hawkishness of Europe’s monetary policy stewards.